Business Valuation Explored

Business Valuation ExploredPart of the Business Transition and Exit Planning

Series

Premiere Date: April 23, 2015

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BUSINESS VALUATION EXPLORED: APRIL 23, 2015

Practical and entertaining education for business owners and executives, accredited investors, and their legal and

financial advisors.For more information, visit www.financialpoise.com

DISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY.

IT SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS

2©2015


http://www.financialpoise.com/

ABOUT THIS EPISODE

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What something is worth is always a matter of opinion, ultimately tested by the

price at which a willing seller and purchase will do a deal. While true, these

words don’t help business owners or their advisors determine what price to sell

for. This webinar will discuss the generally accepted methods of valuing a

business and help business owners and their advisors to apply those methods

to come up with a range of value for the business being sold.

ABOUT THIS SERIES

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Hundreds of thousands of businesses are bought and sold each year. Most sellers,

while successful business owners, are not expert at the “art of the deal.” That is, while

they know their business inside and out and are sophisticated on matters related to it,

most simply don’t have experience in selling a business. From how to market a

business (do you hire a business broker or I Banker?) to how to structure the ultimate

deal (asset sale v. stock sale), and all the issues in between (how do you value your

business? Explaining what an earn-out is and when to use one), this series will cover

issues that ever business owners should understand before selling a business. As with

all Financial Poise webinars, each episode in the series is designed to be viewed

independently of the other episodes: think sitcom rather than soap opera.

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SUMMARY OF EPISODES

EPISODE #1 Business Valuation Explored - PREMIER DATE: April 23, 2015

EPISODE #2 How to get a business ready for sale - PREMIER DATE: May 21, 2015

EPISODE #3 The Buying/Marketing Stage - PREMIER DATE: June 18,2015

EPISODE #4 How to find a buyer - PREMIER DATE: July 16, 2015

EPISODE #5 Purchase Offers - PREMIER DATE: August 20, 2015

EPISODE #6 Letter of Intent Stage - PREMIER DATE: September 17, 2015

EPISODE #7 Closing Stage - PREMIER DATE: October 15, 2015

EPISODE #8 All About ESOPS - PREMIER DATE: November 19, 2015

EPISODE #9 Post Sale Topics - PREMIER DATE: December 17, 2015

*ALL EPISODES ARE AVAILABLE ON DEMAND*

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• Richard Claywell, Richard Claywell, CPA

• Todd Mitchell, CBIZ Valuation Group, LLC

• Gary Lotzer, Business Valuations & Advisory, LLC

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Moderator:

Jonathan Brand, Lakelaw

MEET THE FACULTY


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PRINCIPAL DIMENSIONS

I. Clarify Expectations

II. Prepare Business for Sale

II. Valuation

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WHAT IS BEING SOLD?

Assets v. stock

Real Property and Business, or Business alone?

Review of tax differences

Transferability of assets (contracts, IP)

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CRAFTING THE STORY

Why would Buyer want this business?

What would Buyer want to know?

Real cash flow

History of business; competitive advantages

Tangible vs. intangible assets

Contingent Assets and Liabilities

Employee loyalty, Customer loyalty

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WHO WOULD BUY?

Identifying Target Market

Strategic Buyers

Financial Buyers

Business Insiders

ESOP

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SELLER’S MOTIVATION

Why sell the business? Retirement (e.g., no succession plan)

Family members

Key Employees

Buyout of other shareholder, recap

Market Conditions (Beneficial) Liquidity

Shareholder Dividend

Distressed

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RETENTION OF PROFESSIONALS

Business Broker or Investment Banker

Law, Consulting, or Accounting Firm (or all)

Active or Retired Senior Executives

Understanding personality dynamics between

successful businessperson and crew of shiny and

brilliant professionals

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NEW BALANCE SHEET

Manage for profit and not minimal tax

Timing issues of revenues and expenses

Off-balance sheet assets such as real estate

Contingent Liabilities

E.g., lawsuits, lease-purchase options

Account for related party transactions

Formalizing related party relationships

Normalize the costs of related party expenses

To audit or not to audit

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SELLER LOOKING ITS BEST

Organize Documents and Financials

Tax Returns valid

Review or audit of financial statements,

Consistency- apples to apples

Inventory

Ownership compensation

Related party payments

Disclosure of contingent liabilities

Settlement of Lawsuits / Satisfaction of Liens

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SQUARING THE CORNERS

Qualifications to do business

Software Audit

Updating licenses

Clearing ownership title

Avoiding zoning issues

Formalization of oral agreements

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DUE DILIGENCE(FROM BUYER’S PERSPECTIVE)

Documents likely to be requested by a potential purchaser include:

Profit-and-loss statements

Detail of adjustments to EBITDA

Balance sheets

Tax returns

List of hard assets (e.g., furniture, fixtures, equipment)

List of inventory, analyzed as to usability in the business

Commercial property appraisal or lease agreement

Material contracts

Software and other IP Licenses

Aged list of receivables

Aged list of payables

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NOW, ON TO VALUATION

Common valuation techniques:

Discounted Cash Flows: Determine the value of a company based on the discounted value of its unlevered projected future cash flows

Public Company Multiples: Use available data from similar publicly traded companies to value a subject company based on specific metrics

Private Transaction Multiples: Apply data from similar transactions to value a subject company based on specific metrics

Asset Value / Liquidation: Net value of assets in a liquidation scenario

LBO / IRR: Use reasonable leverage assumptions to determine returns based on different capital structures

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DISCOUNTED CASH FLOWS Overview:

Determine the value of a company based on its unlevered projected future cash flows, discounted at the appropriate cost of capital

Requires assumptions for a specific forecast period and a terminal value at the end of the forecast period

Key Terms:

Free cash flow

Discount rate (cost of capital)

Terminal value

Advantages:

Quantitatively defensible

Disadvantages:

Highly sensitive to inputs

Relies heavily on management forecast

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COMPARABLE PUBLIC MULTIPLES Overview:

Use available data from similar publicly- traded companies to value a subject company based on specific metrics

Examines how the stock market is currently valuing companies within the industry

Public multiples are then adjusted for liquidity, size, control, and company-specific factors

Key Terms:

EBITDA

Liquidity Premium

Size Premium

Advantages:

Current data is readily available

Disadvantages:

Size and liquidity premium is somewhat arbitrary

Truly comparable companies can be scarce for some industries

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COMPARABLE TRANSACTION

MULTIPLES

Overview:

Use available data from similar transactions to value a subject company based on specific metrics

Find a representative selection of comparable, completed transactions and understand the private market drivers that resulted in the reported pricing information

Key Terms:

EBITDA

Advantages:

Situational comparability (what buyers are actually paying in the market)

Disadvantages:

Financial data for private transactions is often not disclosed

Deals occur at different points in time and have multiples that reflect then-current market conditions

Individual data points may be skewed by factors specific to that deal

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ASSET VALUATION Overview:

Determine the value of a company’s assets in a liquidation scenario

Include only assets and liabilities that would be assumed in a transaction

Key Terms:

Net asset value

Liquidation

Advantages:

Provides a “floor” for other valuation methods

Data is readily available via appraisals and company balance sheet

Disadvantages:

Does not accurately reflect the value of a profitable, growing business

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LBO / IRR Overview:

Make assumptions about capital structure to create a desired return

Most private equity firms use this as their primary valuation methodology

Key Terms:

Senior debt

Subordinated debt

Exit value

Internal Rate of Return (IRR)

Advantages:

Takes into account elements of the capital structure that affect returns

Can be tailored to specific IRR thresholds

Quantitatively defensible

Disadvantages:

Highly sensitive to inputs including debt availability and pricing

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QUANTITATIVE FACTORS

AFFECTING VALUATION Financial trends; entity sales in the industry

Asset base

Margins and growth

Capital expenditure requirements (for necessary and expected production)

Working capital needs (including employee expenditures)

Size of the company

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QUALITATIVE FACTORS

AFFECTING VALUATION Management quality and stability

Predictability of revenue streams (identify assumptions underlying projections for validity and bias)

Customer concentration

Intellectual property

Threat of offshore competition

Geographic location

Seasonality and cyclicality

Brand value

Litigation history and environmental concerns

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MORE ABOUT THE FACULTY

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Jonathan Brand

Jonathan T. Brand is a managing attorney at Lakelaw (www.lakelaw.com). Jonathan provides expert advice and counsel in the areas of bankruptcy, chapter 11 reorganizations, commercial litigation, and related transactional matters, and regularly represents debtors, trustees, and creditors in a variety of complex insolvency matters in State and Federal courts. He also assists clients with out-of-court workouts, assignments for the benefit of creditors, and structured liquidations.

Jonathan is board-certified in Business Bankruptcy by the American Board of Certification, rated AV® Preeminent™ by Martindale-Hubbell’s peer review process and earned a 10.0/10.0 rating on Avvo.com. Illinois Super Lawyers recognized Jonathan as a Rising Star in the area of Bankruptcy & Creditor/Debtor Rights in 2012, 2013 and 2014.Jonathan volunteers his time with American Bankruptcy Institute’s Credit Abuse Resistance Education (C.A.R.E.) Program and has provided pro bono representation through the Volunteer Attorney Panel for the Bankruptcy Court for the Northern District of Illinois. Jonathan currently serves as the Co-Chair of the Liaison Committee for United States Bankruptcy Court for the Northern District of Illinois.

Prior to joining Lakelaw, Jonathan served as a law clerk to the United States Bankruptcy Court for the Northern District of Illinois and the Honorable John S. Dalis, United States Bankruptcy Judge for the Southern District of Georgia. Jonathan is a member of American Bankruptcy Institute, the Turnaround Management Association, the Chicago Bar Association, and the Florida Bar. He received his Bachelor of Arts in History and Juris Doctor from the University of Florida.

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http://www.lakelaw.com/


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Gary LotzerMr. Lotzer has over thirty years of diverse, business experience across a broad spectrum of industries. He has served in C-level roles of lower mid-market companies located in the US, Mexico, Europe and Asia. His specialized combination of corporate finance, marketing and operations skills have been successfully applied in venture-backed startup, turnaround and high growth business stages. Particular professional expertise includes strategic planning, business plan development, financial modeling, business valuations and due diligence. Mr Lotzer has founded and co-founded multiple successful companies, and has personally negotiated and structured numerous debt and equity capital transactions. He has also participated in OTCBB and AMEX public capital listings. Prior to joining Hunter Wise he was engaged in M&A as an independent intermediary. He is currently a Managing Director of Hunter Wise Financial Group LLC, a middle-market investment bank, headquartered in Irvine, CA. His office is in Tucson, AZ. Mr. Lotzer holds Series 82 and 63 securities licenses.

He began his career in Chicago in public accounting, but migrated to Milwaukee where he eventually (1986) merged Lotzer & Co CPA’s into Seidman & Seidman/BDO, an international CPA/Consulting firm.

He is a Certified Public Accountant (WI License No. 5757), and long-term member of the American Institute of Certified Public Accountants and holds the Accredited Business Valuation (ABV) credential issues by the AICPA exclusively to licensed CPA’s that complete their rigorous accreditation requirements. He is also a member of the AICPA Forensic and Valuation Services section, Arizona Society of CPA’s and the Arizona Business Broker’s Association.

He is a graduate of the University of Wisconsin – Madison School of Business, and has attended the Thunderbird American Graduate School of International Management Executive Program in Phoenix.

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Todd Mitchell

Mr. Mitchell is a director in the Northeast Region of CBIZ Valuation Group. His responsibilities include the management and execution of engagements, business development and the review and preparation of valuation assignments. Mr. Mitchell has prepared valuation analyses of business enterprises, intangible assets and securities for purposes such as purchase price allocations, impairment testing, mergers and acquisitions, ESOPs, gift and estate planning, and for implementation of stock option plans. Mr. Mitchell has considerable experience in such industries as publishing, automotive parts, biotechnology, financial services and industrial equipment.

Prior to joining CBIZ Valuation Group, Mr. Mitchell was a valuation analyst at Management Planning, Inc., where he was responsible for the completion of various business valuation engagements.

Mr. Mitchell earned his Bachelor of Science degree in business administration with a concentration in finance from The College of New Jersey. He is a CFA charterholder, as awarded by the CFA Institute, and an associate member of the American Society of Appraisers (ASA).

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Richard ClaywellRichard is a practicing Certified Public Accountant, and holds the additional designations of Accredited in Business Valuation, Accredited SeniorAppraiser, Certified Business Appraiser, International Certified Valuation Specialist, Certified Valuation Analyst, Certified in Merger & AcquisitionAdvisor, Master Analyst in Financial Forensics, Certified in Fraud Deterrence, Accredited in Business Appraisal Review. Richard has beenvaluing closely held companies since 1985. Richard’s practice is restricted to business valuation, economic damages, profit enhancement andexit planning.

Richard received his Bachelor of Science in Accounting in 1979 from the University of Houston – Clear Lake. He then received certification as aPublic Accountant in 1983. Over the years, Richard has earned additional accreditations that relate to business valuations, economic damagesand fraud. Richard has been an instructor for the National Association of Certified Valuation Analysts for many years, has been an instructor forthe Internal Revenue Service and the International Association of Consultants Valuators and Analysts (IACVA). Richard is currently the Directorof Education for the IACVA and is responsible for the business valuations materials being taught in 55 countries. Richard has taught businessvaluation or economic damage courses in China, Korea, Taiwan.

Richard has performed over 1,000 business valuations since 1985. Richard has testified in Texas County Court, Texas State Court, BankruptcyCourt and Texas State Courts. Richard has given testimony in economic damages (lost profits), shareholder disputes, personal injury, wrongfultermination and divorce.

Richard has given he following presentations: Practitioners Publishing Company (PPC) Contributing Editor – Guide to Practical EstatePlanning, 2008, 2012 Forensic Accounting Conference - The Risk Assessment and Prevention of Fraud in Business at the NationalTaipei University on April 27, 2012. The presentation was titled “The Meaning and Importance of Risk Assessment and Prevention of Fraud inBusinesses”. 2012 Central University of Finance and Economics in Beijing China, presented a class titled “Relationships Between Risk andValue in Valuation” to graduate students. On April 29, 2012, Richard accepted an appointment to adjunct Professor of Valuation at the CentralUniversity of Finance and Economics and Research Fellow of the Appraisal Institute, Asset Appraisal Institute of the Central University ofFinance and Economics in Beijing China. Co-Presenter of weeklong business valuation course for the Chinese Appraisal Society, November2008, Beijing, China. A partial list of some of the topics instructed include: (1) remaining useful life analysis, (2) survivor curves, (3) valuingcustomer relationships, (4) valuing brands, (5) allocation of goodwill, valuing software, (6) quantifying synergies. 2009 Taipei InternationalConference: Valuation and Forensic Accounting. Presenter, Fraud Prevention and Detection.(November 2009). Chinese Appraisal Society inSeattle Washington, Presenter, Using Income Approaches and Using Guideline Companies, August 2, 2010. Shanghai University of Financeand Economics, Co-Presenter, The Relationships Between Risk and Value: The M & A Transaction, Value and The Valuation Report: What DoYou See?, Value, Fraud, Risk: From Valuation to Fraud, September 19 – 21, 2010. Asian-Pacific Conference on Valuation and IFRS in SeoulSouth Korea, Presenter: Fraud, Risks and Valuations, December 3, 2010 . Chinese Appraisal Society in Beijing China, Presenter,Fundamentals of Business Valuations and Co-Presenter, Valuing Intangible Assets, December 12-13, 2010. The Meaning and Importance ofRisk Assessment and Prevention of Fraud in a Business, IACVA presentation, June 2013, Washington DC. The Meaning and Importance ofRisk Assessment and Prevention of Fraud in a Business, Chicago International Business Valuation Symposium, IACVA presentation, October11, 2013

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About DailyDAC

DailyDAC, LLC provides continuing education to business owners and executives,

accredited investors, and their respective legal and financial advisors. Its websites,

webinars, and books provide Plain English, sometimes entertaining, explanations

about legal, financial, and other subjects of interest to these audiences. Click here

for more information.


©2015

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Business Transition and Exit Planning.com (“B-TEP”), owned by DailyDAC, LLC,

is an online plain-english educational resource for business owners and their trusted advisors

contemplating, or getting ready, to sell their businesses.

Visit us online at

http://www.businesstransitionandexitplanning.com/

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The ChamberWise™ Education Consortium is a resource for Chambers of Commerce to provide its members with valuable member benefits by offering relevant business education webinars; and generate revenue for the Chamber as well.

32©2015

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IMPORTANT NOTE: THE MATERIAL IN THIS PRESENTATION IS FOR

GENERAL EDUCATIONAL PURPOSES ONLY.

IT SHOULD NOT BE CONSIDERED LEGAL,

INVESTMENT, FINANCIAL, OR ANY OTHER TYPE

OF ADVICE ON WHICH YOU SHOULD RELY.

YOU SHOULD CONSULT WITH AN APPROPRIATE

PROFESSIONAL ADVISOR TO DETERMINE WHAT

MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

33©2015

Business Valuation Explored

Education

Transcript of Business Valuation Explored